PENNumbra Publishes Responses to Paying for Long-Term Performance

Professors Lawrence Mitchell and Steven Kaplan respond to Lucian Bebchuk and Jesse Fried’s Article Paying for Long-Term Performance, which appeared in the Law Review earlier in 2010. In The Partner-Manager, Professor Mitchell (The George Washington University School of Law) praises their suggested executive compensation reforms and seeks to place those reforms in the larger context of the evolution of corporate management. He argues that excessive compensation is a recent phenomenon, and, as such, arguments that view it as “inevitable” must be viewed skeptically. He argues that the rise of the independent monitoring board of directors has created informational asymmetries and a power vacuum between the board and management, resulting in the rise of the “partner-manager” whose significant equity stake created the agency problems we see today. While Mitchell accepts that the Bebchuk-Fried reforms will help temper those incentives, he wonders whether they go to the heart of the problem, which he sees as corporate governance.

In Weak Solutions to an Illusory Problem, Professor Steven Kaplan (University of Chicago Booth School of Business) argues that the Bebchuk-Fried analysis is fundamentally flawed because it rests on incorrect assumptions about executive compensation. Kaplan points to empirical work by himself and others that suggests there may be no compensation problem at all. The studies he points to show that compensation tends to rise and fall with the market and that managers are, in fact, rewarded for good performance and punished for poor performance. Kaplan argues that, if anything, the Bebchuk-Fried proposals will add only marginal protections at a high cost: he suggests that their reforms will discourage top talent from serving as executives because it will become significantly riskier to serve at public companies, particularly when lucrative alternatives are available with private-equity-funded firms.